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May 3, 2024

Revenue boom has CT officials rethinking budget timetable

KEITH M. PHANEUF / CTMIRROR.ORG Rep. Holly Cheeseman and House Minority Leader Vincent Candelora (both at podium) discuss new budget proposals at Legislative Office Building. Reps. Tom O’Dea, Rachel Chaleski and Francis Cooley (left to right) are in background.

When state legislators learned Tuesday that the state government would receive billions more tax dollars over the next few years than anticipated, the good news was tinged with bipartisan disappointment.

That revenue report, though filed precisely when mandated by law, came just eight days before the regular 2024 session’s mandatory adjournment. And given the legal and political complexities of Connecticut’s budget controls, there simply wasn’t time to tap those resources.

Legislators who want to invest more than what has been proposed in higher education, health care and social services will have to wait. The same is true for lawmakers with dreams of extending new tax relief to middle-class households with children.

But this spring’s tantalizing numbers have lawmakers on both sides of the aisle questioning whether the budget timetable needs to be changed.

“It would have given us other options that could have been handled within the confines of the [fiscal] guardrails,” said Sen. Cathy Osten, D-Sprague, co-chairwoman of the Appropriations Committee. “We could have done things differently.”

Osten was referring to consensus revenue projections issued Tuesday by Gov. Ned Lamont’s Office of Policy and Management and the legislature’s nonpartisan Office of Fiscal Analysis.

That one report wiped out a host of problems that had led leaders of the legislature’s Democratic majority to decide against revising a preliminary $26 billion budget approved last June for the 2024-25 fiscal year.

The problems solved:

• This year’s small surplus got bigger.

Before the April 30 report, analysts had said the current $25.1 billion budget had a very modest operating surplus ranging from $25 million to $86 million, and many legislators feared the plan would be in the red before the fiscal year ends on June 30. 

Those operating surpluses have been crucial in recent years. Legislators had carried hundreds of millions of dollars in surplus forward from one budget year to the next to fund new initiatives while working around the limits of the spending cap. Because those carry-forward dollars technically were appropriated in a prior year, they don’t count against future cap calculations when they are spent.

But thanks to increasing projections for income and miscellaneous taxes and federal Medicaid payments, legislators now could carry forward portions of a $257 million surplus.

• Next year’s revenue gap is closed.

Because of eroding sales tax receipts, officials had been worried that next fiscal year’s $26 billion budget might come up short on revenue. But while Tuesday’s report showed $325 million in slippage in this area, the entire gap was offset by increases in income tax paycheck withholding, corporation tax receipts and other revenue sources.

• Savings programs are still capturing massive ‘volatile’ revenue.

Connecticut also has an aggressive savings program that bars legislators from spending a portion of quarterly income and business tax receipts. These dollars aren’t even considered part of the General Fund and don’t count toward regular surplus projections.

Democratic legislative leaders and rank-and-file lawmakers have criticized this “volatility adjustment,” saying it is taking stable, reliable tax receipts out of play along with volatile ones.

This system captured an average of $1.4 billion in its first six years. And, excluding the $530 million in took in 2019-20, when the coronavirus first battered the Connecticut economy, it never has seized less than $950 million. The saved dollars are used to bolster budget reserves and pay down Connecticut’s considerable pension debt.

Bu that $1.4 billion average represents more than 6% of this fiscal year’s entire General Fund, and critics say the excessive savings effort is draining resources from core programs like education and human services.

Analysts had been saying that savings bonanza was about to change. The volatility adjustment would still force healthy savings this year and through 2028, but they would become more modest, ranging from $452 million to $487 million, they said. But that all changed on Tuesday, with analysts saying the system would collect $1.1 billion this fiscal year, $1.2 billion in 2024-25, and between $805 million and $910 million in each of the subsequent three years.

Debates over budget controls, more tax cuts must wait until 2025

Those projections led House Speaker Matt Ritter, D-Hartford, and Senate President Pro Tem Martin M. Looney, D-New Haven, to call for a review next year, and likely a reduction in the massive savings mandate.

Some Democratic legislators had been calling for such reforms in February, when the regular session began. But Lamont, a Greenwich businessman and fiscal moderate, opposed any switch in savings requirements.

And most legislators concede that with the regular session ending on May 8, the timetable is too short for prolonged negotiations with the governor.

Most Republican legislators agreed with Lamont, a Democrat, on not changing the savings programs.

But GOP leaders said Connecticut could afford to build upon the big income and other tax cuts provided largely to middle-income households over the past two years.

Republicans particularly favored a new income tax deduction for households with children, up to $2,000 per child. 

The state income tax has seven different rates, ranging from 3% to 6.99%, but much middle-class income is taxed at 5% or 5.5% A $4,000 deduction — for a family with two children — would save filers $200 if those earnings were taxed at 5% and $220 at 5.5%.

House Minority Leader Vincent J. Candelora, R-North Branford, agreed with Osten that legislators would have more options if they had even an extra week or two to consider updated income tax data.

But they and others also said it’s not an easy problem to fix.

Income tax data isn’t reliable until after the April 15 filing deadline

Traditionally, there is very little that can be done before April 15, the annual deadline for filing state and federal income tax returns. The income tax is Connecticut’s single-largest revenue engine by far, generating more than $11.6 billion this fiscal year, or more than half of all dollars needed to support the General Fund. And that April 15 deadline generally produces a flood of new information about household and business earnings that analysts used to estimate future receipts.

But legislators used to receive daily updates on certain income tax trends between April 15 and April 30. And sometimes, although not every year, significant trends in growth or erosion could be identified before the end of the month.

That changed in 2020 and 2021 with the coronavirus pandemic. The legislature ended the 2020 session prematurely in early March to limit spread of the coronavirus disease. And in both years, state income tax deadlines had been pushed back to accommodate households and businesses grappling with other problems.

But since 2022, though most budget procedures have returned to normal, legislators no longer request the daily forecasts, which are compiled by the Office of Fiscal Analysis and supported by data from the Department of Revenue Services.

Both Candelora and Osten said it’s time to reconsider restarting those reports.

“It makes much more sense to have the data as early as you can get it,” Candelora said. “Every day does matter.”

He also noted that while legislators are in session from early January until early June in odd-numbered years, the session in even years runs only from early February to early May. Legislators who are up for reelection generally want to avoid a special session in even-numbered years.

Consensus projections first ordered 15 years ago

Another option, Candelora said, would be to move the April 30 consensus revenue reporting deadline up by five or 10 days.

Legislators mandated 15 years ago that fiscal analysts for the Executive and Legislative branches pool their data three times annually — in the fall, in January and at the end of April — to assess how state revenues are performing. And Candelora noted a reporting deadline has been changed before.

In 2012, Gov. Dannel P. Malloy and his fellow Democrats in the legislature’s majority changed the fall report deadline from on Oct. 15 to Nov. 10, thereby ensuring any news of new budget deficits wouldn’t be disclosed until after elections.

Rep. Maria Horn, D-Salisbury, co-chairwoman of the tax-writing Finance, Revenue and Bonding Committee, said she would be open to discussing earlier income tax revenue reports or updates in April.

“I’m generally in favor of more information,” she said. 

But Horn also noted that the earlier the report, the less reliable it is, given that it’s based on less accumulated data.

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